In the modern “plastic economy,” consumers are using their credit cards and other card instruments and other payment methods for purchasing goods and services in place of conventional purchase methods, such as cash and checks. Consumers have determined that the convenience, deferred payment, transaction tracking (e.g., itemized statements), and dispute (e.g., chargebacks) features make such card instruments a much superior payment mechanism. Likewise, corporations provide corporate credit cards (or other card payment instruments or payment methods) for travel and other business related purposes.
Merchants benefit from the increased usage of card instruments because their sales volume greatly increases. Consumers tend to make fewer purchases when cash at hand is required. Checks can be unwieldy for the consumer and, from the merchant's standpoint, can be less dependable payment sources. As a result, in the modern economy the vast majority of merchants accept card instruments of various types as payment.
As used herein, “card instruments” relates to the various financial accounts that a consumer can use for paying for goods and services. In most, but not all cases, there will be a physical card associated with the account, although in some instances a virtual card, or no card at all, may be associated with the financial account. Card instruments include, but are not necessarily limited to, credit cards (e.g., including general use or private label credit cards), ATM cards, debit cards, check cards, bank cards, stored value cards, and similar products. Card instruments may be embodied by conventional thin plastic (or other material) cards having embossings and magnetic stripe data, as well as so-called “smart cards” or similar devices having processor components and/or readable/writeable memory. Card instruments may comprise various types of so-called “contactless” cards, such as RFID (radio frequency identification) cards, optically-readable cards or other types of cards or tokens which read without physical contact with a reader device.
One disadvantage to merchants accepting card instruments for payment is that typically transaction fees must be paid. For example, card instruments linked to national interchange networks (e.g., the VISA® interchange, MasterCard® interchange, and the like) impose transaction fees on the merchant each time the card is used. Usually, the transaction fee (or a component of the total transaction fee) is imposed as a percentage of the money amount being charged to or debited from the card, although other arrangements such as volume-based transaction fee arrangements may be employed.
Card instruments may also be linked to networks other than the national interchange networks. For example, bank cards, ATM cards, debit cards, and check cards may be linked to regional electronic funds transfer (EFT) networks, ATM networks, or similar regional networks. Merchants tend to favor cards which run transactions over such regional networks because the transaction fees are generally lower than for the national interchanges.
Card instruments may also be linked to processing networks other than national interchange networks and regional networks, such as stored value networks, private label networks, or other transaction networks. A stored value network may be employed as a dedicated network for running stored value transactions (e.g., a SuperFood™ stored value card for grocery shopping). A private label network may be employed for running transactions for private label cards (e.g., Hechts™ card or Nordstrom's™ card).
In sum, there are a variety of card instrument products that merchants can accept for payment. Transactions using most card instruments entail transaction fees that the merchant must pay. With such a large volume of consumer transactions involving card instruments these days, this means that merchants are paying substantial sums of money in transaction fees.
One type of transaction where merchants are paying substantially higher transaction fees involves what is known as “Card Not Present” (CNP) transactions, sometimes referred to as “non-swipe” transactions. CNP transactions are submitted when the consumer is not at a point of authentication (POA) where the physical card can be presented and read by a reader (or otherwise physically inspected). Typically, CNP transactions impose significantly higher transaction fees based on a “base rate” component of the transaction fee that increases on the order of 50 basis points from the base rate component for a conventional “Card Present” (CP) transaction, where the card is swiped or read or otherwise physically available.
For example, in 2003 VISA's® base rate component for a CPS Retail CP transaction was about 1.39% versus 1.80% for a CPS Retail CNP transaction. MasterCard's® base rate component for a Domestic Merit CP transaction was 1.40% versus 1.90% for a Domestic MOTO [MOTO—Mail Order/Telephone Order] CNP transaction. See www.osc.state.nc.us/EPP/SunTrust.html.
Some transaction interchanges now support CNP-type transactions that have somewhat improved security over a conventional CNP transaction. For example, some interchanges have a transaction type that requires a remote purchaser not only to provide the account number and expiration date from the front of the card, but also some other information that is not from the front of the card. For example, there may be digits on the back of the card that the purchaser must provide to the merchant along with information from the front of the card. This means that the purchaser must have information from both the front of the card and the back of the card, presumably meaning that the purchaser has physical possession of the card. This can prevent fraudulent MOTO transactions based on credit card slips gathered from garbage cans outside restaurants, for example.
Such improved CNP-type transactions are still not as secure as a regular CP transaction. For example, a perpetrator of fraud may have a paper copy of the front and back of a credit card, or may have simply written down that information on a piece of paper while the cardholder was not minding his/her card. It has also been reported that the security code on the back of the card can sometimes be fraudulently recreated. Thus, like the conventional CNP transaction, such improved CNP transactions have the same basic security drawbacks to merchants, issuing banks, and transaction processors. Because of these security issues, such improved CNP-type transactions usually impose on the merchant elevated transaction fees charged by the interchange processor. The transaction fees for such improved CNP-type transactions tend to be lower than for the conventional CNP transaction, but they are still higher than for corresponding CP transactions. Thus, the significant cost and security issues of these CNP-type transactions remain significant drawbacks for merchants.
In general, the heavy cost burden to merchants for CNP transactions (of whatever type) is greatly aggravated in market sectors involving a high relative volume of CNP transactions compared to CP transactions. For example, the vast majority (believed to exceed 90%) of airlines reservations are made using CNP transactions. This means that the various airlines pay many millions of dollars out in elevated interchange fees as a result of CNP transactions. Similar burdens are shouldered by mail order companies, Internet-based companies, and other companies transacting a large portion of their business without meeting the customer at the time the transaction is undertaken. This is a significant problem.
Other problems and drawbacks also exist.